Slow Job Creation, Not Job Losses, Driving Unemployment

Unemployment has risen above 10 percent and no one in Washington seems to understand what is going on. Yesterday, a little noticed release from the Bureau of Labor Statistics (BLS) shed important light onto the job situation.

The BLS’s Business Employment Dynamics (BED) program uses unemployment insurance (UI) records to track job private sector job gains and job losses. Because the data comes from administrative records it is highly accurate, but it also takes eight months to process. Yesterday the BLS finally released the data for the first quarter of this year.

By now we already know that unemployment has risen. Another government survey shows that between December 2008 and March 2009 the unemployment rate rose from 7.2 to 8.5 percent. The new BED figures, however, tell us why it went up. The main problem was not increased job losses: companies actually shed 53,000 fewer jobs than in the previous quarter. Unemployment is rising because private sector employers are creating far fewer new jobs than normal. New or expanding businesses created 992,000 fewer jobs than in the last quarter of 2008.

Federal Reserve Board Chairman Ben Bernanke says the economy needs to create at least 100,000 new jobs a month to keep pace with the growing labor force. Unemployment is rising because the private sector is not creating enough new jobs.

Since the recession started quarterly gross job losses increased by 15 percent (1.1 million jobs) while gross job creation fell by 25 percent (1.9 million jobs). The number of workers laid off at businesses going out of business rose by 7 percent (91,000 jobs) and the number of workers hired at newly formed businesses fell by 22 percent (313,000 jobs).

Job losses have increased, but the primary reason unemployment is rising is because businesses and entrepreneurs are creating fewer jobs than normal. Businesses have cut back on making potentially profitable investments and fewer potential entrepreneurs are starting new enterprises. Consequently workers who lose their jobs in the natural churn of the economy now have much greater difficulty finding new work.

This knowledge will come as cold comfort to any breadwinners who are out of work. However the distinction between higher job losses and reduced job creation is important because it implies distinctly different approaches to reducing unemployment.

If the problem is primarily reduced job creation then policy makers should spend less effort trying to shore up endangered existing firms such as General Motors and Chrysler. Job creation at small businesses – which has lead the way out of pass recessions – has shrunk by 411,000 between the start of the recession and the first quarter of this year. Congress should instead create an environment that encourages risk taking, investment, and entrepreneurship. Unfortunately Congress and the administration have done just the opposite.

Federal spending has soared over the past year, and this comes at a price: less private investment. Many economicstudies show that federal spending crowds out private sector investment. Each dollar that Bush borrowed to bail out General Motors or that Obama borrowed for the stimulus came at the cost of less money for private businesses to borrow to fund their own projects. The bailout of the Detroit automakers will not make them profitable – and it reduced the resources available for other potentially productive and job-creating business projects as well.

The American economy is in a hole, and Congress should stop digging. Virtually every major measure on Congress’ agenda discourages business owners from expanding operations and entrepreneurs from starting new firms. Business owners need the confidence to invest. If Congress really wants to increase job creation and reduce unemployment then Speaker Pelosi and Majority Leader Reid should hold a joint press conference and announce that Obamacare, Cap and Trade, and union card-check are off the agenda.

As a research fellow in labor economics at The Heritage Foundation, James Sherk researches ways to promote competition and mobility in the workforce rather than erect barriers that prevent workers from getting ahead. Read his research.

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It's not surprising government would blame the private sector, when government is behind the collapsing of! Government opening their doors with our money, paying for nothing but make-work jobs, while they mandate private sector companies out of business.

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